Are you in need of urgent funding? Merchant cash advances could be right for your business. This article is going to talk to you about what a merchant cash advance is, if it’s a good deal or not, and what that cash REALLY costs you.
With merchant cash advances, a lender is advancing you cash against future receivables, and deposit it directly into your business account. Typically, business owners can get a merchant cash advance in literally 24 hours.
Here’s what you’ll learn in this article
How merchant cash advances work
The cost of a merchant cash advance
Why borrowers choose to get one
Reasons you should be careful
Alternatives to MCA’s
Pro’s of Merchant Cash Advances
Quick access to cash
Bad credit friendly
Great for virtually all businesses
Con’s of Merchant Cash Advances
Higher cost than traditional business funding options
Repaying it can reduce your daily cash flow
How do merchant cash advances work
Merchant cash advances have historically been for businesses whose revenue come from credit card sales and debit card sales. Merchant cash advances are available to other businesses that don’t rely heavily on credit card sales as well. merchant cash advance lenders say their product isn’t technically a loan. These funding instruments can be structured in two ways.
You can get an upfront sum of cash for a slice of the future sales. You can also get upfront cash that is repaid by remitting daily/weekly debits from your bank account.
Instead of making one fixed payment every month from a bank account, with a merchant cash advance you make daily or weekly payments, plus fees, until it’s repaid.
How much you pay in fees is determined by your ability to pay the merchant cash advance. Typically, lenders charge a factor rate – ranging from 1.2 to 1.5 based on its risk assessment of you. The higher the factor rate, the higher the fee you pay. Typically, to calculate your payback you multiply your funded amount by the factor rate.
Percent of credit card sales
The merchant cash advance provider automatically deducts a % of your future credit card sales until the agreed upon amount has been repaid in full. The repayment period usually ranges from 3 to 12 months. The higher your credit card sales, the faster you can repay the merchant cash advance.
For example, say the merchant cash advance provider is deducting 10% of your monthly credit card sales. They will continue to do this until you’ve repaid the $70,000. If your restaurant averages $100,000 in revenue per month, you’d repay $10,000 monthly. This means a daily payment of $333. At this rate, you’d pay off the advance in 7 months. If your revenue dropped to $70,000 per month, you wouldn’t repay the merchant cash advance until the 10th month.
Fixed daily withdrawals
This kind of merchant cash advance agreement has a daily or weekly payment to be withdrawn.
Why do borrowers choose for a merchant cash advance?
Although merchant cash advances an option of last resort, they do have some benefits.
They are quick. Often, you can get an MCA within 24 hours, with little to no paperwork. Provides will look at your credit card receipts to determine if you can repay it.
You won’t lose your home. MCA’s are unsecured financial instruments, so you don’t need to provide collateral. It means you don’t have to forfeit any personal or business assets. If the company goes out of business, you don’t need to worry about paying it off.
When sales are down, you payment goes down too. When your repayment schedule is a % of your daily credit card sales, the repayment is adjusted based on how well or poorly your business is doing.
Reasons to be wary about merchant cash advances
Your APR can be in the triple digits. The annual APR, the borrowing cost, with fees and interested included, ranges from 40% to 350% depending on who you’re borrowing from. This is more expensive than traditional business loans, where the APR is 10% or less. Business credit cards usually have an APR from 12% to 30%.
There’s no early repayment benefit. Since you must pay a fixed amount, you get no savings from early repayment.
No federal oversight. The MCA industry isn’t subject to federal regulations because MCAs are structured as transactions, not loans. They are regulated by the Uniform Commercial Code in each state, not banking laws.
Merchant cash advances are a popular go-to solution
The speed come with a huge price. In this article, we’ll break down everything you must know about a merchant cash advance. These financial loans are a type of business cash advance against your future revenue. You get a lump sum amount of cash, which you then pay back with a % of your daily sa.es The merchant cash advance is designed to help your business with short term financing needs – that need to be funded FAST. They are less stringent than traditional loan, and are a common option for newer businesses.
How does a business cash advance work?
You apply for it online, and in a matter of minutes get approved. You get a lump sum of cash, in exchange for a portion of your future credit card receipts. This repayment begins almost immediately after you take the money. The typical advance is between $3000 and $300,000. Depending on how much you borrow, the repayment period can be as little as 120 days, or as long as 24 months. The average term of a merchant cash advance is 8 to 9 months. The merchant cash advance lender determines how much you’ll need to pay back by looking at your monthly credit card sales. Other factors a lender looks at, is time in business, your industry, and other factors.
Typically, you can figure out what you’ll owe by multiplying your loan amount by the factor rate. For example, if you get $40,000 – your total repayment would range from $44,000 to $60,000. The % of your daily credit card sales that a merchant cash advance lender takes is called the holdback. This range from 8% to 30%. The provider takes a predetermined % of your daily sales directly out of your account until the entire principal and interest is paid back.
Merchant cash advance terms
Factor Rate: This helps you understand how much you will pay back
Holdback Rate: % of your daily sales that the lender will take until you pay back what you borrowed.
Pro’s and Cons of Merchant Cash Advances
Here are some benefits of an MCA.
Pro #1: Quick
When you need capital fast, a merchant cash advance can deliver the funds you need. You can be approved in literally a few hours, and have the funds in your bank account.
Pro #2: Easy to Qualify
With most lenders, you need a credit score over 700. MCA providers tend to be concerned with your daily sales and credit card processing volume. This means even credit scores as low as 500 can be eligible for financing.
Pro #3: No Collateral
Some types of financing require a business owner to offer collateral. This can be land, equipment, or other assets. Merchant cash advances are unsecured, which means no collateral needed. Some MCA provides will require a personal guarantee, which means your business, and perhaps personal, belongings are at risk.
Pro #4: Flexible Payment
You pay based on how much you’re generating in revenue. If your revenue goes down, the % repayment goes down. If your revenue goes up, the % repayment goes up.
Pro #5: High Borrowing Limitsmerchant cash advance lenders lend you up to 250% of your credit card sales. If you can prove consistent sales, chances are you’ll qualify for a larger merchant cash advance.
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